O’Brien: Facebook has become financial giant, but not an invincible one

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FILE – In this May, 26, 2010 file photo, Facebook CEO Mark Zuckerberg talks about the social network site’s new privacy settings in Palo Alto, Calif. Zuckerberg turns up at business conventions in a hoodie. Cocky is the word used to describe him most often, after billionaire. He was Time’s person of the year at 26. So when he takes Facebook public, why would he follow the Wall Street rules? The company is expected to file as early as Wednesday, Feb. 1, 2012 to sell stock on the open market in what will be the most talked-about initial public offering since Google in 2004, maybe since the go-go 1990s. Around the nation, regular investors and IPO watchers are anticipating some kind of twist – perhaps a provision for the 800 million users of Facebook, a company that promotes itself as all about personal connections, to get in on the action. (AP Photo/Marcio Jose Sanchez, File)

The numbers in Facebook’s IPO filing give us the picture of a juggernaut, but not an unstoppable one.

Such filings must recite a list of even the most unlikely of risk factors. Many are just boilerplate, often to avoid lawsuits. And that’s certainly the case with Facebook.

But there are four areas where the company shows clear vulnerability. In fact, it’s no exaggeration to say that, in some cases, these issues could sabotage the company’s growth:

Mobile: For me, this subject was the most startling. Facebook said it had 425 million monthly active users who access the site through a smartphone, tablet or some other mobile gadget. That’s more than half of the 845 million who use Facebook.

The problem: Facebook serves no ads on its mobile products. And therefore, it makes no money directly from those mobile users.

“If users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected,” the filing warns.

Everyone knows mobile is not just the future, it’s today. So what is Facebook’s plan to capture the mobile market?

“We believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds,” the IPO filing reveals.

In other words, not much. The lack of a clear mobile strategy was the headline for Chris Silva, an analyst with Altimeter Group.

“The fact that they haven’t done anything with mobile, it serves as an Achilles’ heel,” he said.

How worried should Facebook and potential investors be?

“I think it can materially change the fortunes of Facebook,” Silva said.

Zynga: We’ve long known that the San Francisco-based creator of social games such as “FarmVille” and “CityVille” has been one of the most popular attractions on Facebook. Still, the IPO filing revealed that 12 percent of Facebook’s revenues come through ads and payments from Zynga games. What’s more, that’s up from 10 percent the previous year.

Zynga, for its part, had an IPO in December, and had already revealed that it’s still primarily dependent on revenue from its Facebook games. Now we learn that Facebook seems to need Zynga almost as much.

“If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected,” according to Facebook’s IPO filing.

User growth: The company has built its remarkable revenue growth by insisting that it was mainly focused on building its user base. The strategy has paid off, and Facebook has silenced the doubters.

But there are only so many people online, about 2 billion, and Facebook has 845 million of them. Subtract the 500 million in China, and there aren’t many left to get. Inevitably, growth slows.

So, during the past year Facebook has emphasized plans to increase what it refers to as “engagement,” or essentially the amount of time we spend doing stuff on Facebook.

The open question, then, is whether the same people doing more stuff, posting more photos and sharing more links will allow Facebook to continue growing revenues and profits at the same clip.

Silva, for one, was quite optimistic that changes Facebook is making will allow them to make more money from each user. He points to changes such as “Timeline,” the name of the new layout for users’ profiles, and the “open graph” that allows other services to feed activities of users directly into Facebook as reasons to believe the social network can address this challenge.

“They still have a massive number of users to capitalize on,” Silva said. “Timeline and the open graph will up the engagement ante. There’s a lot more juice they can get out of this orange.”

Governance: I put this last. But it will no doubt give investors some serious night sweats. Zuckerberg has arranged extraordinary agreements that allow him to vote the shares of his biggest investors. That gives him final say on just about all strategic decisions and corporate governance issues.

That’s fine as long as profits are headed up and to the right. But if there is a stumble, all the criticism is likely to fall on Zuckerberg’s shoulders. The pressure from the markets will be intense. And when that happens, his ideals will be tested to a degree that it may be hard for him to imagine.

Whether he rises above, or cracks, could determine Facebook’s fate. And ultimately, his own legacy.

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